Despite being the largest US bank, JPMorgan has found itself lagging behind its biggest rivals in the cash equities business. Based on its annual investor day presentation, the bank is looking to turn this around by continuing to make investments in electronic trading and hedge fund services, hoping this will help the bank become a Top 3 firm in cash equities.
According to research firm Coalition Ltd, in 2013 JPMorgan ranked first in investment banking, equities origination, fixed income, commodities and currencies, while coming in second for derivatives products.
Unfortunately, JPM ranked sixth globally in cash equities in 2013 reflecting a 5th place rank in North America, a seventh place rank in EMEA and an 8th place finish in Asia.
Most industry experts explain JPM’s struggles in cash equities to be a result of weakness in electronic equities trading. While most of JPM’s competitors have been investing heavily in this area in recent years, JMP focused instead on sales and equity research. Only recently has JPM started investing in boosting its electronic trading capabilities.
A study released recently by Tabb Group backed up this contention. In a survey of 58 head equity traders of both long only investors and hedge funds in Europe, the UK and the US, Tabb found that they rated UBS, Morgan Stanley and Credit Suisse as the best providers of electronic equity trading systems. JPMorgan was not mentioned.
Strategy To Turn Around This Weakness
In JPMorgan’s recent investor’s day presentation, Mike Cavanagh and Daniel Pinto, co-heads of the firm’s investment bank, said the bank plans to ‘strengthen its equities position this year.’
Part of the bank’s strategy to accomplish this would be to make continued investments in prime brokerage, electronic trading, equities (including equity research), and OTC Clearing and Collateral Management (particularly in EMEA).
However, some at the bank suggest that JPM just needs to get more aggressive with customers making sure they get paid for the services they provide – a move that their competitors have been much better at than JPM.
Tim Throsby, global head of equities in London explained this issue, “In the past, those top players in this space were very aggressive in having persistent, repeated conversations with their clients, saying, ‘What are you giving us? That was never our approach. That’s something that other firms were far more effective at earlier than we were.”
However, some might ask whether it makes sense for JPM to try and boost its position in cash equities. After all, the cash equities business has suffered from falling volumes and squeezed profit margins in recent years.
In fact some European banks cut back on their cash equities businesses given these tough market dynamics. For example, Barclays, Nomura, and UniCredit have all reduced their equities businesses in the past six months.
Despite these trends, JPM management feel that the equities business can be profitable, particularly for the top players in the business, with the top three firms in cash equities generating handsome profits.
JPM’s Ultimate Goal
Throsby summed up JPMorgan’s goal for its cash equities business, saying “One of the big themes for the firm is to bring cash equities up to that same level [as the rest of the bank]. There are some very obvious areas where we are working to improve, and where we think there is a great opportunity. Third or fourth place would be a realistic medium-term ambition, with second or third in the long term.”
That’s a pretty big ambition to move from 6th to 2nd in cash equities, but given what JPMorgan has done with the rest of its business, your probably don’t want to bet against them. We will just have to wait and see.